5 Common Mistakes People Make With Their 401(k) Plan

Signing up for a 401(k) plan through your employer can be a great way to build retirement wealth. But they're not always explained to employees in great detail, and overlooking a few aspects of your 401(k) could cost you lots of money over time.

Here are some common mistakes people make with their 401(k) plans and how to avoid them.

1. Not knowing how much you're paying in fees

Your fees will include the expense ratio (the fee the fund charges) and any applicable administrative costs the plan administrator charges. Most 401(k) plans charge between 0.5% to 2%, with the average being 1%. A 1% fee would mean you pay $10 in fees for every $1,000 in your portfolio.

You don't have complete control over all plan fees, like maintenance fees, but you do have control over the expense ratio, which is how much your fund charges people who own it.

If you have the option, look for a fund within your plan that has a low expense ratio. For example, if you want a good investment option with a low fee, choose an exchange-traded fund (ETF). These have an average expense ratio of 0.37%.

2. Not taking advantage of employer match programs

Many employers offer a 401(k) matching program that essentially gives you free money. If you're not taking advantage of any available matching programs, you're leaving money on the table.

Let's assume your employer matches 100% of contributions, up to 3% of your salary. If you earn $75,000 and contribute 3% of your salary to your 401(k) for the year, your 401(k) contribution will be $2,250.

But because your company matches 100% of your contributions up to 3% of your salary, it, too, will put $2,250 into your 401(k) for the year. That means you'll have a total of $4,500 in contributions in your 401(k) brokerage for the year. Several years of matching contributions will add up quickly.

3. Leaving your job before your account has vested

If your employer matches your contributions, there is usually a period you need to stay at the company before you get to keep the entire match. This is called a vesting period.

For example, if your company has a three-year vesting period and you leave the company before the three years are up, you lose the employer's contributions. Your contributions, however, are still yours.

If you have a 401(k) at your current employer and are looking for a new job, look at the vesting schedule before deciding to leave. Staying a little longer could mean holding onto thousands of dollars.

4. Not increasing your contribution amount over time

It's easy to set your 401(k) up and then forget about it, but you should revisit how much you contribute to your plan every time you get a raise.

Most experts recommend saving and investing 15% of your pre-tax income. Increasing your contributions each time you get a raise will ensure you don't fall behind that goal.

There is a limit to how much you can contribute to your 401(k) each year, and for 2023, it's $22,500. Most people don't max out their 401(k) contributions, so don't stress about reaching that amount; just focus on increasing your contributions each time your pay goes up.

5. Leaving your 401(k) at your old job

When you leave a job, you need to decide what to do with your 401(k). Usually, you can transfer the 401(k) to your new employer, if it offers one, or do a 401(k) rollover.

The benefit of rolling your 401(k) over to an individual retirement account (IRA) with a brokerage firm is that it can give you more control over your investments. Many 401(k)s are limited to target date funds and simplified investment choices, but with an IRA, you can buy and sell individual stocks and other funds.

Whichever option you choose, talk with your former employer about the process. You'll have to have the funds released and placed into an IRA, 401(k), or other retirement plan within 60 days. Holding onto it longer will result in the money being taxed as income as well as paying an early withdrawal penalty of 10% if you're younger than 59 1/2.

Don't sweat the small mistakes

You're in good company if you've made some 401(k) mistakes; I've made a few on this list. If you don't know how much you're paying in fees or left your 401(k) sitting for too long at your old job, don't let those mistakes keep you from moving forward.

The best thing you can do is focus on what you want to do better with your investments, like reducing your fee amounts or rolling over your 401(k), and then take the next step toward making that happen.